ESG developments and three trends to watch in 2021

In the last five years, environmental, social and governance (ESG) investing has gone mainstream, and it has never been more popular

In the last five years, environmental, social and governance (ESG) investing has gone mainstream, and it has never been more popular.

Assets under management at funds incorporating ESG, whether for risk management, compliance or impact investment, now total more than US$40 trillion[i], up from US$12 trillion in 2012. And there could be an additional asset growth of up to US$15-20 trillion in ESG funds in the next 20 years due to an increasing interest in ESG from millennial, female and high net worth investors[ii].

ESG-focused financial products, active and passive, have proven to meet investors’ expectations when and where financial and extra-financial returns are concerned: Among US companies on the S&P 500 index, those that scored in the top fifth of ESG rankings by MSCI et al. outperformed their counterparts in the bottom fifth by at least three percentage points every year for the past five years.[iii]

The risk/return opportunities in ESG investing, the shift in investor preferences and the availability of new products have driven more investors towards considering ESG approaches such as screening, integration and engagement in their investment decision making processes. With investors, policymakers, regulators and service providers contributing to a strong ESG momentum in 2021, we observe three key ESG trends to watch:

1. Looking at ’E’ beyond climate risk

In the past few years, investors have been trying to align themselves with the Paris Agreement (2015) and scenarios laid out by the Task Force on Climate-related Financial Disclosures (TCFD)[iv]. Investors have focused on measuring their GHG footprint, aligning investments with 1.5- and 2-degree transition trajectories and more recently on meeting Net Zero Carbon targets.

More recently, on the environmental side, topics such as biodiversity, water pollution, circular economy have all been gaining more attention.

In 2021, we will see a strong stakeholder appetite for strategies focusing on nature. For a good reason: According to the IPBES[v] (Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, 2019), US$44 trillion of economic value generation is highly dependent on biodiversity and ecosystem services, with key implications for the Construction, agriculture, food and beverage sectors. Healthy ecosystems can also protect against the spread of zoonotic diseases such as COVID-19.

2. Social resilience is gaining momentum

In times of COVID-19, and against the backdrop of the ‘Black Lives Matter Movement’ many social (‘S’) issues rose to the fore over the course of 2020.

And with the increasing focus on mental and physical health and wellbeing, the challenges for workers and businesses during this pandemic, as well as with the rising inequalities, calls for social cohesion and for a ‘Just Transition’, social resilience is here to stay.

In 2021, we are likely to see more investor interest in ESG and sustainable finance vehicles that meet social and societal objectives, such as social, sustainability/-linked and SDG-linked bonds[vi].

3. Better governance of information through harmonisation

Clarity, consistency and comparability of ESG data remain key challenges for ESG investing.

Over the course of 2020, multiple normative standard setters in reporting and accounting such as SASB, IIRC and GRI, and most recently the IFRS, have communicated their commitments to align and standardise corporate ESG reporting efforts.

The regulatory authorities are following suit. In March 2021, the EU’s Sustainable Finance Disclosure Regulation (SFDR, EU Directive 2019/2088) will require asset managers to report on the sustainability characteristics of their investments.[vii] Coupled with technology advancements in the field of AI and Fintech, standardisation of ESG standards and frameworks will be a driving force for the growth of ESG investing over the course of 2021 and beyond.

Martina Macpherson, Head of ESG Strategy and Member of the Executive Committee, ODDO BHF AM & Private Equity

For more information on how we reflect on these ESG themes within our investment processes and to find out more about our stakeholder dialogue activities, please visit our website here.

Endnotes

[i] Opimas, ESG Data Integration by Asset Managers: Targeting Alpha, Fiduciary Duty & Portfolio Risk Analysis, 17 Jun. 2020, Link: here

[ii] Bank of America Merril Lynch, ESG from A to Z: A Global Primer, 2019, see Link: here

[iii] Bank of America Merril Lynch, ESG from A to Z: A Global Primer, 2019, see Link: here

[iv] TCFD, Recommendations of the Task Force on Climate-related Financial Disclosures, 2017, Link: here

[v] IPBES, Global Assessment Report on Biodiversity and Ecosystem Services, 2019, Link: here

[vi] SDG/KPI-linked bonds focus on targets as set out by the U.N. Sustainable Development Goals (2015), see also ICMA, Sustainability-Linked Bond Principles, 2020, Link: here

[vii] European Parliamnent and European Council, REGULATION (EU) 2019/2088, 27 Nov. 2019, Link: here

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